In a chat with ET Now, Sandeep Agarwal, Managing Director of Soluo Investments shared his views on the markets, the sectors that are getting interesting after the correction, and the areas where caution still remains.
Values are more comfortable
According to Agarwal, the recent market downturn has made the underlying valuations in the sectors very attractive, even though volatility is high. “There is still a lot of volatility and we can’t say that things are perfect, but valuations are very high right now,” he said.
“Also, the RBI is continuing to push for some liquidity and apart from crude oil, we don’t see a huge jump in inflation numbers. So it’s a good time for long-term investors to start looking at the market. Valuations are very high and better than ever, even in mid-cap and small-cap stocks. Across many sectors, there are two or more shortfalls across a bar or multiple reasons.”
He added that while global events remain unpredictable, the domestic backdrop appears supportive.
“So I would say yes, it’s time to start buying. Obviously you can’t tell what international events might happen, but other than that things are looking good on the local front.”
The IT sector is back on the radar
One of the most noticeable changes in Agarwal’s outlook is his renewed optimism about the IT sector – a place he had avoided for more than a year. “We are now very constructive in a sector where we have not invested at all in the last 14-15 months – IT,” he said.
“I’m more positive on the tech side than I’ve been in a long time. A lot of stocks are at a very reasonable range, except for the ER&D play. So it’s a very attractive sector right now.”
He also pointed out that the sector’s fundamentals remain strong despite concerns about artificial intelligence and pricing pressures.
“I have never had a negative view of the business model. Our business is very complex – we are the software factory of the world,” Agarwal said.
“The issue this time was that the business model suffered on the effort side due to AI. A 20-25% reduction in effort was expected. Since contracts are typically for five years, there is 3-4% annual inflation. So companies need to grow 8-9% to even grow 5%.”
He noted that currency movements were also supported.
“With the rupee around 92, companies are getting 3-4% gain in PAT due to currency. So 8-9% profit growth and 15-16 times valuations for large caps makes it a comfortable investment.”
The previous values were inflated, he said.
“Earlier I was unhappy because the PEG ratios were very high. The rupee was around 86-87 and the growth was almost zero. With zero profit growth you cannot justify a multiple of 25-28.”
Private banks appeal again
Agarwal also believes that private sector banks are becoming attractive again after the recent reforms. “PSU banks are posting very good numbers and there is a good way forward,” he said.
“But valuations of PSU banks have gone up a bit, while private banks have corrected. Only the incremental premium for being in PSU banks is diminishing, so we are now looking at private banks as well.” He expects better risk reward in select private lenders as valuations become more reasonable.
Capital goods and manufacturing show green plants
Another area that is turning interesting is the manufacturing and capital goods space, where demand trends are improving.
“The manufacturing space has been very slow for the last one to one-and-a-half years, but now we are seeing green shoots,” Agarwal said.
He identified opportunities across the power and infrastructure ecosystem.
“The whole space from cables, wires and transformers – which is also part of the ecosystem play for the AI theme – with the main capex companies and industrial goods, looks good.”
However, he added that in wires and cables, his preference is for smaller companies where valuations are lower.
“We like the space but we’re not looking at big names because they’re too expensive. We’re more interested in smaller, lesser-known companies where growth is good and multiples are low.”
Pharma preference is shifting to generics
In pharmaceuticals, Agarwal said his strategy has shifted from contract manufacturing to generic drug companies.
“In pharma we have again changed our selection from CDMO to generic pharma and big branded players,” he said. “There’s a lot of value. The big drug names in the generic branded space are the ones we choose.”
He added that the CDMO segment is currently trading at prices that look too expensive for comfort. “CDMO is very expensive right now, so we are focusing on generic branded drugs where we believe there is good value over a two to three year horizon.”
Areas of focus: Defense, Metals, EMS
Despite spotting opportunities in many sectors, Agarwal remains cautious about certain pockets of the market.
He said defense stocks do not fit into his fund value philosophy because of their high valuations. “We avoid investing in defense because it does not fit our value philosophy,” he said.
“Although demand will increase due to the current geopolitical situation, we believe that valuations do not justify the risk.” Likewise, he sees limited upside in metal stocks after their strong rally over the past year.
“Metals have done remarkably well over the past year and we don’t foresee much of a comeback from here,” he said. Instead, he prefers to play the subject indirectly.
“We prefer semi-plays such as pipes and related products over direct metal companies because the sector is very volatile.”
Electronic Manufacturing Services (EMS) is another area where values remain a concern. “The EMS space is still expensive. Values are priced for integrity and do not account for any waste,” Agarwal said.
“When expectations are so high, any disappointment can lead to a quick adjustment.”
Oil & Gas, FMCG and Auto are not preferred
Agarwal also said his team remains cautious about oil marketing companies and the broader oil and gas sector. FMCG stocks are also not among his current favorites.
He added that the auto sector, which has delivered strong earnings in recent years, may also see some caution from investors.
“There’s already a lot of money being made in cars, so we’re going to be a little more cautious from here.”
Long-term opportunities are emerging
Overall, Agarwal believes that the recent market correction has created an environment where long-term investors can gradually start building positions, even if global uncertainty remains.
With liquidity support from the central bank, moderation of inflation concerns and improvement in valuations across sectors, he said the risk-reward equation in equities has once again become favourable.
But he stressed that investors should remain bullish and focus on sectors where valuations and earnings outlooks align – particularly IT, private banks, manufacturing and pharmaceutical companies.
